ANSWER SHEET INSTRUCTIONS:
The exam consists of multiple choice questions. Multiple choice questions are answered by selecting A, B, C, or D.
You may use pen or pencil.
California Real Estate License Exam Prep:
Unlocking the DRE Salesperson and Broker Exam
Chapter 7: Contracts
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Chapter 7: Contracts 125
• General
• Listing agreements
• Buyer-broker agreements
• Offers/purchase contracts
• Agreements
• Promissory notes/securities
• Purchase/lease options
• Advanced fees
acknowledgment (q. 55)
bi-lateral contract (q. 10, 26)
breach (q. 2)
business opportunity
listing (q. 54)
capable parties (q. 15)
coercion (q. 4)
consideration (q. 11)
counteroffer (q. 12)
duress (q. 4)
enforceable contract (q. 14)
essential elements of a
contract (q. 3, 6, 30)
exchange (q. 16)
exclusive agency listing (q. 24)
exclusive right-to-sell listing
(q. 9, 31)
fraud (q. 56)
hold harmless clause (q. 32)
land contract (q. 17 – 21)
lease (q. 57)
liquidated damages (q. 22, 42)
listing (q. 23, 25, 28, 29)
loan assumption (q. 37)
mutual consent (q. 5)
net listing (q. 33)
novation (q. 38)
open listing (q. 27, 34)
option listing (q. 41)
option to buy (q. 39, 53)
purchase agreement (q. 44, 45)
qualified endorsement (q. 13)
rejection (q. 8)
rescission (q. 47)
revocation (q. 35, 43, 48)
specific performance (q. 49)
Statute of Frauds (q. 1, 50)
tender (q. 51)
termination (q. 8, 36)
time-essence provision (q. 46)
unenforceable (q. 7, 52)
void (q. 40)
voidable contract (q. 4)
Chapter 7: Contracts
Key Concepts
Critical real estate concepts equaling approximately 12% of the state licensing exam.
Key Terms
Fundamental real estate vocabulary likely to appear on the state exam with reference to the
quiz questions illustrating its application. See the Real estate glossary on page 331 for the full
definitions.
126 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
JUST THE FACTS
General
A unilateral contract is a contract in which party makes an express promise in exchange for the
other party’s performance of an act. Thus, a unilateral contract is essentially a promise for an act.
For example, a broker employed under an open listing is not obligated to use diligence in their
efforts to locate a buyer. The broker only has a best-effort obligation since the broker does not “accept”
the employment until they locate a buyer interested in the property. Thus, an open listing is legally
classified as a unilateral contract, as is an option contract.
A bilateral contract is a contract in which a promise by one party is given in exchange for a promise
made by the other party. It is a promise given in exchange for a promise, both parties being required
to perform.
For example, when representing a seller under a written exclusive listing, the broker (and their
licensees) has entered into a bilateral employment agreement. Such an employment obligates
the broker to exercise due diligence by way of a constant and continuing search to locate ready and
willing buyers, while keeping the seller informed of their progress.
An executed contract is a contract in which both of the parties have performed the duties they
agreed to. Alternatively, an executory contract is a contract in which some activity remains to be
performed by one or both of the parties to the transaction.
A valid contract is binding and enforceable against the parties. There are four essential elements
of a valid contract:
• capable parties;
• mutual consent;
• legal object; and
• consideration.
To be capable, the parties need to:
• be of sound mind;
• possess their civil rights; and
• be at least 18 years of age.
Mutual consent in real estate contracts is formed in three steps:
• the first party makes an offer to the second party, such as a buyer offering to purchase a seller’s
property;
• the second party accepts the offer without qualification; and
• the second party communicates their acceptance to the first party.
Note: This section is designed to give you a broad understanding of the basic principles which
relate to the subject matter of this chapter. However, it is not exhaustive. For further reading on
this concept, see your Real Estate Principles and Legal Aspects licensing course materials.
Chapter 7: Contracts 127
However, if the original offer is accepted by the second party but on different terms, the second party’s
response becomes a counteroffer submitted from the second party to the first.
Both the form of consideration and the purpose of a contract are required to be lawful in order for the
contract to be valid.
Further, under the state Statute of Frauds law, certain contracts need to be in writing and signed
before they are legally enforceable, including:
• a contract with the intent to convey, transfer or sell real estate;
• a listing agreement employing a broker to sell a property, regardless of the length of the listing;
• any contract that will be performed greater than a year after it is entered into;
• any lease with a term exceeding one year; and
• an agreement to repay the debt of another.
Void and voidable are contract terms which are similar but are distinguishable by the date they
affect the validity of a contract, and thus, the rights of those who relied on the contract.
Void contracts are unenforceable.
Examples of void contracts include a:
• contract signed and delivered by a seller under the age of 18 (here, the contract is void due to
legal incapacity); or
• contract in which the consideration is illegal, such as a controlled substance.
A voidable contract, unlike a void contract, is a contract that is valid and enforceable after delivery
until it is challenged due to a defect and a court order declares the contract to be invalid.
Examples of voidable contracts include a contract:
• obtained through false representations; or
• obtained through undue influence or threat.
Some performance contracts may be assigned, transferring the rights and duties held under a
contract or agreement from one person to another. Similarly, a novation agreement substitutes a
new contract into the place of an existing one.
Failure to perform under a contract is known as a breach.
Listing agreements
A listing agreement is a written employment contract between a client and a licensed real estate
broker. On entering into a listing agreement, the broker is retained and authorized to perform real
estate related services on behalf of the client in exchange for a fee.
The client retaining a broker may hold an ownership interest in real estate, which the client seeks to
sell, lease or encumber as collateral for trust deed financing.
The person employed by a client to provide real estate services in expectation of compensation will
always be a licensed real estate broker. Likewise, if a dispute arises with a client over the client’s
failure to pay a fee, only the broker employed by a written listing agreement signed by the client
may pursue collection.
128 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
A real estate licensee employed by the broker may have obtained the listing, but the licensee did so
acting on behalf of the broker. The licensee has no independent right to enforce the listing agreement.
The relationship created between the client and the broker and properly documented by a written
listing agreement has two distinct legal aspects:
• an employment relationship; and
• an agency relationship.
The employment relationship established on entering into a listing agreement specifies the scope
of activities the broker is to undertake in the employment and authorizes the broker to carry them
out by contract.
On the other hand, the agency relationship is imposed on the broker by law as arising out of the
representation authorized by the employment. Agency carries with it the fiduciary duties of
loyalty and full disclosure owed by the licensee to the client.
A variety of listing agreements exist, each employing and authorizing a broker to perform real estate
related services under different conditions. The variations usually relate to the:
• extent of the broker’s representation;
• type of services to be performed by the broker; and
• events which trigger payment of a fee.
Most listing agreements are for the sale or purchase of single family residential (SFR) property
intended to be occupied by the buyer. Others are for residential and commercial income-producing
properties, such as industrial, motel/hotel, retail stores, office, farm or unimproved properties.
Despite the application of various agreements to the type of property described in the listing, all
listings fall into one of two general categories:
• exclusive (an example of a bilateral contract); or
• open (an example of an unilateral contract).
Under an exclusive listing, a broker receives the sole right to represent:
• an owner by marketing the listed property for sale or lease and locating a buyer or tenant;
• a buyer or tenant by locating property; or
• the borrower to obtain mortgage financing.
Two types of exclusive employment agreements for buying and selling real estate exist:
• an exclusive agency agreement for a seller or buyer; and
• an exclusive right-to-sell or right-to-buy listing agreement.
Both types of exclusive listings establish the broker and their agents as the sole licensed real estate
representatives of the client. However, they are distinguished by whether or not the broker has any
right to a fee when the property is sold or located solely by the efforts of the client.
Under an exclusive agency agreement’s fee provision, the broker does not earn a fee when the client,
acting independently of the client’s broker and any other broker, accomplishes the objective of the
employment, i.e., selling the listed property or locating and buying the property sought.
Chapter 7: Contracts 129
Conversely, during the listing period under an exclusive right-to-sell/buy agreement’s fee provision,
the broker earns a fee no matter who produces the buyer or locates the property sought, be it the
client, another broker or other representative of the client, or the client’s broker.
Similarly, an option listing is a variation of the exclusive right-to-sell listing. Its unique feature is
the additional element of a grant to the broker of an option to buy the property at a predetermined
price, if the property does not sell during the listing period.
An open listing, sometimes called a nonexclusive listing, does not grant exclusive rights to the
broker and their agents to be the sole representative of the seller. Also, the client may enter into open
listings with as many brokers as they choose to without becoming obligated to pay more than one
fee.
A brokerage fee under an open listing to sell real estate is due a broker only if the broker procures
a ready, willing and able buyer and presents the owner with a full price offer from the buyer to
purchase the listed property.
The terms contained in the offer submitted by the broker will be substantially the same as the terms
sought by the owner under the listing to earn a fee whether or not the seller accepts it. If other terms
are offered by a buyer and accepted by the owner, the broker will still earn their fee.
For a broker to be entitled to a fee under an open listing, the licensee needs to present the offer to the
owner before the property is sold to some other buyer located by another broker or the owner. Also,
the offer needs to be submitted before the listing expires or is revoked by withdrawal of the property
from sale or by the termination of the agency.
Further, a net listing is used only with sellers and can be structured as either an open or an exclusive
type of listing. The net listing is distinguishable from all other listing arrangements due to the way
compensation is calculated.
In a net listing, the broker’s fee is not based on a percentage of the selling price. Instead, the seller’s
net sales price (excluding brokerage fees and closing costs) the seller is to receive on closing is stated
in the listing agreement. The broker’s fee equals whatever amount the buyer pays in excess of the
seller’s net figure and closing costs.
Buyer-broker agreements
An exclusive right-to-buy listing agreement is used by brokers and their agents to prepare and
submit to prospective buyers their offer to render services on their behalf as the buyer’s real estate
agent. Under it, agents are employed to locate property sought by the buyer in exchange for the
buyer’s assurance they will pay a fee to the agent when the buyer acquires the type of property they
seek.
When entering into an exclusive right-to-buy agreement, the buyer’s broker and their agents agree
to undertake the task to diligently locate, gather and disclose information and data for available
properties on the buyer’s behalf.
The buyer, who has until now been treated as a customer, now becomes a client. As a client, the
buyer authorizes the agent to act on their behalf to locate and look into properties known to be on
the market but unlisted or listed with other brokers.
130 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Offers/Purchase contracts/Agreements
For real estate sales to convey ownership of a property, the primary document used to negotiate the
transaction between a buyer and seller is the purchase agreement (PA), also known as a deposit
receipt. Numerous California publishers produce purchase agreement forms, all of which are legal
for use in California.
A purchase agreement may be terminated under the following situations:
• rejection or counter by the party who receives the offer, which terminates the original offer
• natural expiration, which occurs when a time limit is given and passed for the formal
acceptance or rejection of an offer;
• revocation of the offer by the submitting party prior to the communication of its rejection or
acceptance by the party who received the offer; or
• the death of a buyer prior to the communication of the rejection or acceptance of the offer.
Two basic categories of purchase agreements exist for the documentation of real estate sales. The
categories are influenced primarily by legislation and court decisions addressing the handling of the
disclosures and due diligence investigations in the marketing of properties.
The two categories of purchase agreements are for:
• one-to-four unit residential property sales transactions, which are protected, targeted
transactions imposing a greater degree of disclosure on the parties; and
• other than one-to-four unit residential property sales transactions, such as for residential and
commercial income-producing properties and owner-occupied business/farming properties.
Escrow instructions provide yet another variation on the purchase agreement. For example, a
buyer and seller having orally agreed on the terms of a sale, with or without the assistance of an
agent, contact an escrow company to handle their transaction. Escrow instructions are prepared and
signed, without first entering into a real estate purchase agreement. Here, the escrow instructions
bind the buyer and seller as though they had entered into a purchase agreement.
A letter of intent is a non-binding proposal signed and submitted to a property owner to begin
negotiations.
An addendum is an attachment to a contract or agreement used to incorporate an additional
provision agreed to but not included in the boilerplate provisions of the agreement. Similarly, an
existing contract may be amended with the mutual consent of both parties.
Promissory notes and securities
The promise to pay the debt is set out in a written contract called a promissory note. A promissory
note, also referred to as a note, is a document given as evidence of a debt owed by one person (the
borrower/debtor/payor) to another (the lender/carryback seller/payee).
A note documents the terms for repayment of a debt, including:
• the amount of the principal to be paid;
• the interest rate charged on the remaining principal;
• the periodic payment schedule; and
Chapter 7: Contracts 131
• any due date. [See Chapter 4]
A mortgage-backed bond (MBB) is an asset-backed security representing a claim on the cash flows
from payments received on a mortgage. MBBs are sold on the secondary mortgage market.
A real estate investment trust (REIT) is a corporate security traded on the stock market as a conduit
for making investments in income-producing real estate, trust deeds and government securities.
REITs are the point at which the stock market and the real estate market collide, and are one way for
individuals to invest in income property, without purchasing and operating the property themselves.
Purchase/lease options
An option to purchase a property from a seller imposes no obligation on the buyer to open
escrow and purchase the property. Conversely, the option contains the seller’s irrevocable offer that
obligates the seller to sell the property on the terms stated in the option agreement if the buyer
decides to buy the property within a set period of time, called the option period.
Thus, the option agreement allows the buyer to control the property without committing themselves
to purchase it until they exercise the option, if ever.
When the buyer exercises the option, a bilateral sales contract is automatically formed, no differently
than had they accepted an offer from the seller to sell the property under a purchase agreement
containing nearly identical terms. Thus, on exercise, both parties become obligated to perform as
agreed and must proceed with closing the sale since no contingencies exist.
In an option agreement, the owner/seller is referred to as the optionor and the potential buyer is
referred to as the optionee. [See Chapter 8]
The other significant use of an option to buy relates to residential and commercial leasing
arrangements. A purchase option may be structured as a stand-alone contract or incorporated into
a lease. In this context, a purchase option offers a prospective tenant the ability to later acquire
ownership of the property they will be occupying.
A lease with an option to purchase is distinguished from the purchase rights held by a tenant under
a right of first refusal agreement.
Unless the seller is given something in exchange for the right, the option fails for lack of consideration.
While consideration is needed to create an option agreement which is binding on the seller or
landlord, the amount of the consideration paid for an option may be a minimal amount. Further,
while consideration is necessary for a purchase option to be enforceable, a method for payment of
the purchase price or a closing date are not.
Thus, the option, like all contracts, needs to have the four essential elements to be enforceable.
Unless a particular manner for exercising the option is specified in the option agreement, any
communication from a buyer to a seller of their intention to exercise the option is sufficient.
132 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
Advanced fee
Broker fees deposited with the broker before they are earned are called advance fees. Advance fees
will be deposited in the broker’s trust account. The funds belong to the client of the broker, not the
broker, and may not be withdrawn by the broker before they are earned and a statement is sent to
the client.
In addition to trust fund accounting requirements, a broker needs to send the client a verified
accounting for the advance fees:
• no later than the end of each calendar quarter, and
• at the time the contract between the broker and client is fully performed.
Before a broker may solicit, advertise for and agree to receive an advance fee, the advance fee
agreement and materials are to be submitted to the Commissioner of the Department of Real
Estate (DRE) for approval at least 10 calendar days prior to use.
If the Commissioner, within 10 calendar days of receipt, determines the material might mislead
clients, the Commissioner may order the broker to refrain from using the material.
To be approved by the Commissioner, the advance fee agreement and any materials to be used with
the agreement will:
• contain the total amount of the advance fee and the event triggering the fee or the date the fees
will become due and payable;
• list a specific and complete description of the services to be rendered to earn the advance fee;
• give a definite date for full performance of the services described in the advance fee agreement;
and
• contain no false, misleading or deceptive representations.
addendum
arbitration
boot
habendum
mediation
wild document
Exam Jargon
Specialized real estate terminology related to contracts. See the Real estate glossary on page
331 for the full definitions.
Chapter 7: Contracts 133
SAMPLE QUESTIONS
1. Which of the following contracts needs to be in writing in accordance with the Statute of
Frauds?
a. A lease for one year.
b. The sale of growing crops.
c. A contract that is not to be performed for thirteen months.
d. A contract that is to be performed within one year.
2. Failure to perform as agreed under a contract is known as a(n):
a. novation. c. breach.
b. illegal act. d. damages.
3. The essential elements of an enforceable contract are:
a. express, consideration, mutuality, lawful object.
b. mutuality, written, competent parties, lawful object.
c. communicated, written, competent parties, lawful object.
d. competency, mutual consent, lawful object, consideration.
4. If one party in a contract is coerced or placed under duress by the other party, the contract is
at the discretion of the injured party.
a. void c. illegal
b. voidable d. unenforceable
5. Mutual consent is typically evidenced by:
a. offer and acceptance. c. duress.
b. fraud. d. agreement over some contingencies.
6. All of the following are essential elements of a contract, except:
a. an offer. c. consideration.
b. acceptance. d. performance.
7. Which of the following is true?
a. An illegal contract can be an enforceable contract.
b. A valid contract can be an unenforceable contract.
c. A void contract can be enforced by one party only.
d. “Voidable” means “void unless validated.”
8. An offer is terminated by:
a. rejection by the offeror. c. revocation by the offeree.
b. rejection by the offeree. d. a request for an extension by the offeree.
9. On an exclusive listing, a broker can be disciplined for failure to do all of the following, except:
a. attach a tax statement to the listing.
b. give a copy of the listing agreement to the seller.
c. include a definite termination date.
d. represent the best interests of their client.
134 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
10. A listing agreement in which a seller agrees to pay a broker a commission if they produce
a “ready, willing, and able” buyer and agree to use due diligence in procuring a buyer is an
example of a(n):
a. bilateral executory contract. c. unilateral executed contract.
b. unilateral executory contract. d. bilateral executed contract.
11. In a contract, the terms “adequate, valuable, good or sufficient” refer to:
a. capital. c. character.
b. consideration. d. compensation.
12. Seller Vega listed a vacant lot with Broker Wright for $120,000. Prospective buyer Marty
submitted an offer at a purchase price of $100,000 with the offer to expire in 30 days. The next
day, Seller Vega countered at $110,000. Buyer Marty rejected the counter. Three days later,
Seller Vega delivered to Broker Wright a signed acceptance of Buyer Marty’s initial $100,000
purchase offer. When Broker Wright told Buyer Marty of Seller Vega’s acceptance, Marty stated
he did not intend to buy the property. Based on the foregoing actions:
a. there is no contract.
b. the contract is unenforceable.
c. a unilateral contract has been made.
d. the buyer must submit a counteroffer.
13. Writing “without recourse” on the back of a check creates a(n):
a. qualified endorsement. c. restrictive endorsement.
b. blank endorsement. d. open endorsement.
14. All of the following contracts do not need to be in writing in order to be enforceable, except:
a. An agreement by a buyer to assume an existing loan secured by a deed of trust.
b. An agreement which is not to be performed within one year of being entered into.
c. A listing to lease real property for one year.
d. Both a. and b.
15. All of the following persons may not lawfully enter into a valid contract to purchase property,
except:
a. unemancipated minors. c. convicts.
b. minors who are wards of the court. d. international buyers.
16. A(n) is an example of a bilateral contract in which both the offeror and the offeree
are grantors.
a. land contract c. open listing
b. exchange agreement d. mortgage
17. A real estate transaction in which the buyer gains possession of a property while the seller
retains legal title until the debt is fully repaid is an example of a(n):
a. mortgage. c. land sales contract.
b. trust deed. d. sublease.
18. The right of possession and equitable title is held by the:
a. vendee. c. trustee.
b. vendor. d. trustor.
Chapter 7: Contracts 135
19. Under a land sales contract for the sale of real property, legal title is held by the:
a. trustor. c. vendee.
b. beneficiary. d. vendor.
20. Upon the default of a buyer under a land sales contract, the seller:
a. instructs the trustee to initiate foreclosure.
b. requests a deficiency judgment against the buyer through the courts.
c. files a quiet title action.
d. files a lis pendens action.
21. In order to qualify for recording with the County Recorder, a land sales contract needs to:
a. have a policy of title insurance issued.
b. contain a granting clause.
c. include a bill of sale.
d. be signed by both the buyer and seller and be acknowledged before a notary public.
22. Liquidated damages cannot exceed ______________ in the instance of an owner-occupied one-
to-four unit residential property:
a. sales price c. 3% of the sale price
b. actual costs d. the buyer’s cash down payment
23. The typical listing contract authorizes a broker to:
a. find a purchaser and obligate their principal to a contract to sell.
b. find a purchaser and accept a deposit with an offer to purchase.
c. guarantee a third party that an offer meeting the terms of the listing will be accepted by
their principal.
d. transfer the real property that is the subject of the listing.
24. All of the following statements are incorrect, except:
a. Brokerage commissions are limited by law.
b. Under an exclusive agency listing, the seller may not liable for a commission if they sell
the property themselves.
c. A finder may only take part in transaction negotiations when employed by a broker
under a written employment agreement.
d. A broker may never collect a commission if a sale is consummated after a listing has
expired.
25. A salesperson obtains a listing on a family member’s house. After taking the listing, the
salesperson changes brokers. The listing:
a. belongs to the salesperson’s previous broker.
b. belongs to the salesperson.
c. belongs to the multiple listing service (MLS).
d. is terminated by the change of employing broker.
26. A listing agreement can be described as:
a. a promise for a promise. c. an executory contract.
b. a bilateral contract. d. All of the above.
136 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
27. When a broker has a nonexclusive listing, to be legally entitled to a commission, they need to
be able to prove they:
a. timely provided a conflict of interest disclosure to the buyer.
b. somehow contributed to ultimate sale of the property.
c. they were the procuring cause of the sale.
d. aggressively marketed the property.
28. The authority of the broker to accept a good faith deposit from a buyer is provided for in the:
a. deposit receipt. c. listing agreement.
b. escrow instructions. d. lease agreement.
29. The most essential element of an enforceable listing contract is that it provides:
a. written authority for the broker to accept a deposit.
b. an offer to purchase property by a ready, willing and able buyer.
c. a written contract documenting the broker’s employment.
d. a mutual agreement concerning the broker’s commission.
30. A listing agreement needs to comply with all the legal requirements for a valid contract,
including:
a. offer and acceptance.
b. the full performance of an unlawful purpose.
c. the guarantee of an unspecified consideration.
d. acknowledgment and recording.
31. Under which one of the following listing contracts must an owner pay a commission, regardless
of who sells the property?
a. An exclusive agency listing. c. A net listing.
b. An exclusive right to sell listing. d. An open listing.
32. The hold harmless clause in a listing agreement protects the agent from liability for:
a. any type of lawsuit.
b. misrepresentations by the agent to third parties.
c. misinformation about the property from the seller.
d. damages resulting from the buyer misrepresenting their loan qualifications.
33. Under a(n) , the agent’s fee is set as all sums received exceeding a net price
established by the owner.
a. open listing c. net listing
b. cancelled listing d. exclusive agency listing
34. Brokers Phoebe and Saul both have an open listing on a property. Broker Phoebe showed the
property to a prospective buyer, but the buyer decided not to buy. Two weeks later, Broker Saul
contacted the same buyer and arranged a sale of the property. The seller is obligated to pay a
commission as follows:
a. the full amount to Saul. c. fifty percent to each broker.
b. the full amount to Phoebe. d. to be negotiated.
Chapter 7: Contracts 137
35. Broker Matthews took a 90-day exclusive agency listing to sell a property owned by Tyler. After
30 days without selling the property, Tyler sent Broker Matthews a letter cancelling the listing.
One week later, Tyler enters into open listings with several other brokers. Two weeks later, one
of the brokers sold the property. In this situation, Tyler:
a. did not have the right to give open listings to the other brokers.
b. had a right to relist the property and had the right to cancel Matthew’s listing.
c. owes the commission only to the broker who procured a buyer.
d. is liable for payment of a commission to Matthews as well as to the selling broker.
36. Which of the following is an acceptable termination date for an enforceable exclusive listing
of residential real property?
a. 30 days from completion of construction of the property.
b. 3 days after the service of notice of rescission by either the seller or the listing agent.
c. 60 days after receipt of a conditional loan commitment.
d. 180 days after the listing agreement is signed.
37. When Jack sells his home, he wants to be relieved of the primary liability for payment of the
existing loan. He needs to find a buyer who is willing to:
a. take the property subject to the existing loan.
b. assume the existing loan.
c. execute a land contract.
d. make a large down payment.
38. When an existing contract is replaced by an entirely new contract, it is an example of:
a. assignment. c. novation.
b. rescission. d. reconstruction.
39. All of the following are false concerning an option, except:
a. A fiduciary duty exists between the optionor and the optionee.
b. Only the optionor is bound to perform under the terms of an option.
c. Consideration does not actually have to change hands so long as the option says it has.
d. The optionee has created a legal interest in the property.
40. A contract based on an unlawful purpose is:
a. void. c. unenforceable.
b. voidable. d. enforceable, if in writing.
41. Broker Greg took a listing on a commercial office complex and received an option to purchase
the property within one month. On the 25th day of the listing, Broker Greg decides to buy the
property. Before buying the property, Broker Greg is required to:
a. disclose the existence of any outstanding offers received on the property to the seller.
b. disclose all material information to the seller.
c. obtain written consent from the seller which acknowledges any profit or anticipated
profit.
d. All of the above.
138 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
42. A buyer and seller initial the liquidated damages clause in a real estate purchase agreement.
The buyer later defaults. The amount recoverable is:
a. given to the seller when escrow opens.
b. limited to 3% of the selling price.
c. given to the seller after the default.
d. used to pay any costs incurred by the seller and then returned to the buyer.
43. Heather made an offer to purchase real property. The seller accepted the offer but Heather died
before this acceptance was communicated to her by the seller’s agent. Based on these facts,
which of the following is true?
a. Notification of the seller’s acceptance to the administrator or executor of Heather’s
estate compels her estate to perform and close escrow.
b. The death of Heather constitutes a revocation of the offer.
c. The offer and acceptance constitute an enforceable contract, even if Heather was not
aware of the acceptance.
d. The accepted offer is binding on the administrator’s estate since the deed was not
delivered before Heather’s death.
44. A broker receives an offer from a buyer. The deposit is in the form of a personal promissory note
for $20,000 payable to the seller in 60 days, plus 10% interest. Which of the following is true?
a. The broker cannot accept a note as a deposit.
b. The broker needs to present the offer and not mention the form of deposit to the seller.
c. The broker needs to accept the promissory note but must notify the seller the deposit is
in the form of a promissory note.
d. Any deposit for the purchase of real property needs to be in the form of cash or a certified
check.
45. When does a broker not have to present an offer to purchase real property to their principal?
a. When all the contingencies have not been removed.
b. If the offer is for a commercial property.
c. When the offer is patently frivolous or the broker is acting on written instructions of the
principal.
d. When the broker has disclosed to the seller in writing why they did not present the
offer.
46. The instrument most likely to state that “time is of the essence” is a(n):
a. exclusive authorization and right to sell. c. open listing.
b. real estate purchase contract. d. option.
47. A real estate buyer can rescind an offer until:
a. the seller has agreed to an appointment.
b. the offer has been presented to the seller.
c. the seller has accepted the offer.
d. the seller’s acceptance has been communicated to the buyer.
Chapter 7: Contracts 139
48. Anita signs a real estate purchase contract as a buyer. The contract states the offer to purchase
is valid for three days. One day later, Anita wishes to rescind her unaccepted offer. Which of
these answers is correct?
a. Anita may revoke her offer, but is responsible for her agent’s commission.
b. Anita is bound to perform since the offer is irrevocable for three days.
c. Anita may revoke the offer and recover her deposit.
d. Anita may revoke the offer but will lose her deposit.
49. All of the following may request specific performance when damages resulting from a breach
of the contract are not adequate, except the:
a. purchaser. c. attorney-in-fact for one of the principals.
b. broker. d. seller of a parcel of land.
50. Under a land sales contract, title is conveyed to a buyer when they pay the
remaining unpaid amount on the purchase price.
a. one-fourth c. three-fourths
b. one-half d. all
51. An offer to perform in accordance with contractual obligations is an example of:
a. a conditional offer. c. tender.
b. a covenant. d. performance.
52. A husband signed a contract to sell community real estate without his wife’s signature. The
contract is:
a. voidable. c. unenforceable.
b. binding. d. void.
53. Which of the following is true concerning an option?
a. No consideration is necessary to create an option.
b. An option is void if the consideration is inadequate.
c. An option is valid so long as consideration is actually delivered.
d. None of the above.
54. To be enforceable, the listing of a business opportunity:
a. needs to be in writing. c. does not always have to be in writing.
b. never has to be in writing. d. needs to be exclusive.
55. Acknowledgment by a notary public of the signature on a deed is done as a prerequisite for:
a. recording the deed at the county recorder’s office.
b. providing constructive notice of the grantee’s rights in the property.
c. proving the validity of the deed.
d. avoiding forgeries.
56. Any intentional concealment of material facts by an agent is regarded as:
a. misrepresentation. c. collusion.
b. fraud. d. commingling.
57. The terms “index,” “triple net” and “flat” are used to describe:
a. linkages. c. rural land use.
b. leases. d. freehold estates.
140 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
ANSWER KEY
1. c — The Statute of Frauds, based on an old English statute, requires written contracts for
actions not to be performed within one year.
2. c — The failure to perform under a contract is known as a breach. The concept of answer
selection A. novation is referenced in another question in this section.
3. d — Another question in this section on the Statute of Frauds shows that not all contracts need
to be in writing, eliminating both answer choices B and C.
4. b — The party that suffers from duress has the right to cancel the contract. Therefore, the
contract is voidable by the injured party only.
5. a — Mutual consent implies both parties have agreed to the contract. Thus, one party has
made an offer and the other has accepted.
6. d — Performance is not essential to form a valid contract. Performance may be required to
complete the activity called for in a contract after it has been signed (offer and acceptance), but
is not necessary to the formation of a contract.
7. b — An oral contract for more than a year may be valid but unenforceable.
8. b — This requires knowing who is who in the question. The offeror is the person who made the
offer. The offeree is the person who may accept or reject an offer.
9. a — An exclusive listing requires a definite termination date. Further, copies of all documents
that are signed need to be given to the person who signed them. A tax statement does not need
to be attached to the listing.
10. a — Bilateral refers to a promise to perform made by one party in exchange for a promise to
perform made by another party. Executory means the promised activities will be performed
by both parties in the future.
11. b — Consideration is something of value provided to both participants to a contract which
induces them to perform. Another question in this section is premised on this topic. Get in the
habit of recognizing when a question or answer choice offers information on another question.
12. a — When a counteroffer is made, no matter what the reason may be, the original offer is
voided.
13. a — “Qualified” suggests the endorser meant to set certain restrictions on the check. In this
instance, if the check is not honored, the endorser is not liable.
14. d — This is very similar to another question in this section on the Statute of Frauds. A slight
derivation on another question will likely exist on the state exam.
15. d — Foreign buyers may lawfully enter into a valid contract to purchase property.
16. b — This question requires you to identify a bilateral contract in which both parties may be in
both positions. Only an exchange agreement provides this opportunity.
17. c — Neither trust deeds nor mortgages transfer possession without concurrently transferring
legal title.
18. a — The reference to “equitable title” indicates this question is framed in the context of a land
sales contract in which the participants are the vendor (seller) and the vendee (buyer). In
most cases, the party name ending in “or” owns the real estate. The “ee” (vendee) is the buyer
and therefore has possession and equitable title of a property, but not legal title.
19. d — This is the reverse of a question in this section on the right of possession and equitable
title. Again, the vendor (seller) holds legal title to the property until the debt is repaid in full.
Chapter 7: Contracts 141
20. c — In the instance of a land contract, also known as a contract sale, there is no trustee. Further,
the vendor already has legal title to the property so answer selection D would impact them
(the seller) rather than the vendee (the buyer). Thus, on a default by the buyer, the seller files a
quiet title action.
21. d — Unlike a transfer by grant deed, a land sales contract needs to be signed by both parties.
The signatures require acknowledgment before a notary public to be recorded.
22. c — Liquidated damages are limited to 3% of the sales price on an owner-occupied one-to-
four unit residential property (a protected property).
23. b — Each of the wrong answers can be seen as incorrect. An agent cannot obligate the seller to
accept an offer nor can they transfer property owned by the seller.
24. b — Under an exclusive agency listing, the broker is guaranteed a commission if the property
is sold by anyone, unless the seller is excepted in the listing agreement. Though less common,
this may occur when a FSBO seller later enters into exclusive agency with a buyer’s agent,
but personally sells the property to a buyer obtained from their efforts when the property was
sold as a FSBO.
25. a — The broker is the agent to the principal and the salesperson is an agent of the broker. The
listing was generated under the prior broker’s license and thus stays with that broker.
26. d — All of the answer selections are correct.
27. c — To collect a commission, the broker needs to locate a buyer who is ready, willing and able
to buy, and they must prove they were the procuring cause of the sale.
28. c — Another question in this section also covers broker authorization. The authorization is
contained in the listing (employment) contract.
29. c — The critical element to recognize in this question is that a listing contract is an employment
contract.
30. a — Answer choice A is the only acceptable answer. You cannot guarantee or perform illegal
acts. Listings are not recorded, nor do they require acknowledged signatures.
31. b — An exclusive right to sell listing agreement guarantees a commission will be paid to the
broker regardless who sells it.
32. c — This clause is in the listing contract between the seller and the broker, for the broker to be
“held harmless.” Logically, it is protection against actions by the other party to the contract.
33. c — The answer is in the question. A net listing gives an established amount to the seller and
all the excess to the broker.
34. a — An open listing guarantees the entire commission to the procuring broker (Saul in this
example).
35. d — The open listing guaranteed payment to the procuring broker. The exclusive listing is a
bilateral contract which cannot be voided unilaterally. Therefore, the seller owes a commission
to both brokers.
36. d — An exclusive listing requires a specific termination date. This is generally based on the
date the listing contract is signed.
37. b — The buyer’s assumption of the loan is the only answer selection offered that will relieve
the seller of the primary responsibility for the underlying debt. Though the obvious answer
would be for the seller to pay off the loan, that answer selection is not provided and therefore
cannot be selected.
142 Unlocking the DRE Salesperson and Broker Exam, Sixth Edition
38. c — This question illustrates the need to be familiar with real estate terminology. Under a
novation, there is a substitution or exchange of a new obligation or contract for an old one by
the mutual agreement of the parties. Refer to the Real estate glossary at the back of this book for
definitions to critical real estate terms you are likely to encounter on the state exam.
39. b — The optionor is the owner of the real estate. Thus, the optionor is the only party obligated
to perform under the terms of the option.
40. a — Any contract to perform an illegal act is void by definition. This is one of the four essential
conditions of a contract.
41. d — This is an example of full disclosure. All of these conditions need to be met in order for
the broker to correctly exercise their option to purchase the property.
42. c — The amount recoverable under a liquidated damages provision in a purchase
agreement is not always limited to 3%, only for one-to-four unit residential property. The only
answer that is true is C.
43. b — Had the buyer’s death occurred after communication of the acceptance of the offer by the
seller’s agent, her estate would have been responsible to complete the escrow.
44. c — A deposit for the purchase of property may be made in any form. However, the broker
needs to disclose the form and amount of the deposit to the seller.
45. c — While this is the correct answer, as a matter of prudent practice, an agent is to disclose the
existence of all offers to the seller, unless the seller explicitly instructs otherwise.
46. b — The purchase agreement is the only contract offered that would require a response from
the opposing party within a stated period of time. This is a good example of a question in which
the wrong answers may be eliminated, thus leaving only the correct one remaining.
47. d — It is the communication of the acceptance of the offer to the buyer that limits their ability
to rescind the offer.
48. c — Until the offer has been accepted, and the acceptance has been communicated to the
buyer, Anita is free to revoke the offer.
49. b — The parties to an escrow do not include the broker. Thus, the damages described do
not include the broker’s fee nor would the broker have any authority to demand specific
performance.
50. d — Like most contracts, such as the purchase of an automobile, title is not conveyed until the
final payment has been made.
51. c — To make an offer is to “tender” the offer. Refer to the Real Estate Glossary if any of these
terms are unknown.
52. c — Both owners of community property need to be involved in the sale of property held
by both parties.
53. c — The amount of consideration is not relevant. However, the consideration itself needs to be
delivered to create a valid and enforceable option.
54. c — Be wary of “never” and “always” in questions such as this. In this case, a business
opportunity sale may include real estate which requires the listing to be in writing. Recognize
that an open listing is not exclusive and yet is still valid and enforceable.
55. a — Recording requires a notary acknowledgment verifying the identity of the signors.
Even if a deed is valid, it cannot be recorded without acknowledgment.
56. b — Intentional concealment is the key to the question. This is the condition required to
evidence fraud beyond mere misrepresentation.
57. b — All of these terms relate to leases as they describe how rent is to be calculated and charged.
